LaSalle on why having an ESG policy is critical to capital raising

This article was sponsored by LaSalle Investment Management. It appeared in the ESG Investor Survey, a sponsored supplement appearing alongside the July/August 2019 issue of PERE magazine.

How has LaSalle Investment Management’s ESG policy evolved over the years?

Our ESG policy was first developed in 2009 and implemented in 2010. Lynn Thurber was chair of the firm then and she was very forward thinking and passionate about ESG; and she still is. The UN Principles for Responsible Investment (PRI) were launched around that time and there was a general realization that the sector was going to have to formalize its commitment to ESG. So LaSalle got on board and became an early signatory of the PRI.

I was hired to really drive the integration of the policy across the company; to ensure ESG issues became an integral part of every business process and a priority at each stage of the investment life cycle from acquisition to active management through to disposition. Two and a half years on and I think we have been successful in delivering that outcome.

We are now actively considering how best to incorporate relatively new ESG themes, such as climate risk and resilience, and health and wellness, into our existing policy going forward.

What part does policy play in entrenching ESG as business priority in the firm and ensuring every member of staff is thinking about these issues?

Our ESG policy is purposefully general in scope, which has allowed us to strategically implement ESG themes in areas where we have the most expertise and therefore achieve the greatest impact: the real estate assets for which we provide investment advisory services. For example, LaSalle team members responsible for asset oversight have had a program in place, for several years now, to measure and manage the environmental consumption of our client properties.

The program used the Urban Land Institute Greenprint environmental management system, and LaSalle relied on third- party property managers to apply it. LaSalle is now better suited to implement and drive the program. We are now in a position to capture more timely and accurate feedback, with access to data that are informing future decisions. In my opinion, having a formal policy in place allows us to drive our ESG agenda from the top down to the actual management of the physical assets on the ground.

And in order for the policy to succeed, for these issues to become deeply entrenched across the global business, it is essential to have senior management buy-in. Management firms need a senior leader who is an enthusiastic proponent of ESG as a business priority. Lynn Thurber took on that mantle at LaSalle several years ago and has passed it on to our global CEO, Jeff Jacobson. As a result of their influence, the firm continues to make ESG issues a priority at every level across the business. It is also critical for investors to see this buy-in from the senior leadership team.

Our Global Sustainability Committee is also very important. To have professionals across the entire firm who are not only interested in the topic but committed to it is important. For example, we have asset managers on our committee who are interested in the topic but are also implementing it at the asset level. Then we have fund managers who are deeply involved with our annual GRESB reporting. That buy-in across the entire firm is essential. Our job is to ensure that everyone across the firm feels educated on ESG and feels empowered to go out on their own and drive it within their own role.

Is having an ESG policy critical to attracting capital?

Yes, it is critical. Pretty much every due diligence questionnaire we receive from investors now has questions on ESG. I spend about 15 percent of my time answering these questions. That also includes investors that may not be that interested in it themselves, but know that they have to ask these questions on behalf of their constituents. Some investors may not believe in it personally but they know it is best practice. This means that to raise capital these days an ESG policy is a must-have and that policy must be properly implemented.

Investors want to know whether we have an ESG policy and how we report on our ESG policy from a transparency perspective. The next question we get from investors is how our ESG policy is integrated into the investment processes. These are the most common diligence questions. Some investors want even more detail such as the carbon footprint of the fund in which they are invested. Others want to receive a regular report with ESG initiatives at the buildings. Investors are really becoming more granular with their diligence questions. They want evidence that we are improving assets through our ESG initiatives.

Do you see a difference in the level of investor ESG due diligence depending on their geographic location?

The intensity is higher from European, Nordic and Dutch investors. European investors were definitely the first movers in the space. Seventy-seven percent of European investors have an explicit ESG policy in their own organizations, far more than either Asian or American investors. Canadian and Australian investors are also ahead of the curve.
In the US, we are seeing the coastal markets lead the way on ESG. Everyone recognizes the California Public Employees’ Retirement System and The California State Teachers’ Retirement System as leaders in this space, but others are becoming more proactive and starting to ask more questions of their managers.

To date, we do not get too many ESG or sustainability-related questions from investors in Asia or non-coastal US, but I expect that will change soon.

Our position as a manager is always to be proactive in terms of volunteering information on ESG, whether an investor requests it or not.

Even if an investor is only interested in us confirming that we have an explicit policy, we will always go one step further and explain to them how we implement that policy in practice.

How do you measure the impact of ESG on actual returns and performance and how do you demonstrate that track record to investors?

We demonstrate our ESG track record through reporting. We have evidence of improvements in our year-over-year GRESB scores and strong track record in our PRI scores.

It is more difficult to measure the direct impact that ESG initiatives have on overall returns and investment performance.

We can trace the impact of a certain project, for example an LED retrofit on net operating income, which improves asset valuation, but it is tough to isolate that initiative when it comes to overall investment performance.

That does not mean we do not give the ESG initiatives credit for their impact on investment performance, it means we do not isolate it in our reporting.

Frankly, nowadays, even with correlating ESG to financial outcomes being challenging, everyone in the sector recognizes that it is best practice. It is an expectation. If an investment manager is ignoring it, they will not achieve the risk-adjusted returns they want.